The Reserve Bank of Australia’s move to a “neutral bias" on monetary policy has angered the Abbott government, which believes any upward pressure on the dollar makes economic management in the next two to three years more difficult.

The central bank has been informed directly of Treasurer
Joe Hockey
’s displeasure.

The Reserve Bank shifted to a neutral position on future interest rates in February when board members ­indicated they were finished with a ­two-year cutting cycle.

Monetary policy had been on an “easing bias" – an expectation the next move in interest rates would be down.

The central bank signalled it had ­little choice but to shift position in ­February after a rebound in key ­economic indicators, including for inflation.

The decision ended a cycle that took the official cash rate to a record-low 2.5 per cent from 4.75 per cent.

The neutral stance leaves open further rate cuts if there is an unforeseen shock such as an economic slump in China or big budget cuts at home.

More importantly, however, it leaves open the prospect of higher rates. Concern is mounting among some economists that official rates are too low given signs of strength in the labour market, with more than 80,000 jobs created in recent months.

Related Quotes

Company Profile

All eyes will be on this week’s ­consumer price index. Analysts ­predict headline inflation surged in the first quarter to 3.2 per cent, the fastest pace in more than two years and above the top of the Reserve Bank’s 2 to 3 per cent target range.

The government’s displeasure over the stance of monetary policy comes at a challenging time for the Reserve Bank board, which is ­juggling the need to drive down the high dollar against risks of an asset-price blowout, particularly for house prices.

Senior government sources say they understand the central bank’s concern about property prices, but its stance does not help put further downward pressure on the dollar, and, if anything, is contributing to the renewed strength in the currency.

Losing the currency war

Reserve Bank officials have been extremely frustrated at the dollar’s rise since late January, when it fell to a multi-year low of US86.83¢. Since then it has rallied strongly to a 4½-month high of just over US94¢ last week, re-igniting fears for export-exposed parts of the economy, including manufacturers. It traded at US93.27¢ late Monday.

Assistant governor
Guy Debelle
told an audience in Canberra last week that he had no idea why the ­dollar had risen recently.

Officials have hinted that the future direction of the currency is more likely to be influenced by US Federal Reserve’s monetary policy than anything Australia’s central bank does or says.

For example, while the dollar has climbed, expectations about the future level of official Reserve Bank interest rates are almost unchanged.

Interest rate futures indicate investors expect the cash rate to remain around the current level for another year, a sign the local dollar’s recent rise is being driven by factors other than interest-rate expectations.

Reserve Bank governor
Glenn ­Stevens
, and other senior bank figures, have in recent weeks repeatedly shunned public opportunities to “jawbone" the currency lower, for instance, by describing it as un­comfortably high as the bank did on several occasions late last year.

This shift comes after a realisation that attempting to impose small shifts in the level of the currency using “verbal intervention" is difficult to finesse and can backfire.

Canberra says economic management will be a particularly “nuanced game" in the next two to three years as the economy adjusts to the end of the mining investment boom and activity starts to lift in the non-mining sector, and as the government seeks to slash the size of government.

The government’s budget strategy is to try to underpin activity and confidence during this period by encouraging a massive private sector infrastructure build while cutting government spending in the May budget, though many cuts will not take effect until after the next federal election in 2016.

Its capacity to produce big spending cuts in spending in the next two years are severely hamstrung by extensive promises of no policy change made by Prime Minister Tony Abbott before the election as well as his excessively generous paid parental leave scheme proposal.The Reserve Bank is not alone in getting the direction of the US dollar wrong in recent months. A number of the world’s biggest hedgefunds that focus global macroeconomic trends have posted large losses on ill-fated bets the US dollar would rise this year.